So you’ve decided to start your own business. You’ve figured out what it is you want to offer and who you want to serve. Congratulations! Before jumping in, there are a few steps you need to take that can help set you up for success.

Whether you are creating a business from scratch or buying into a ready-made concept, you should write a business plan. A business plan is basically the blueprint for your business. It will help you consider key aspects of your business that some people don’t think about until it’s crunch time. Your business plan doesn’t have to be super fancy and extensive like traditional plans usually are, but you should have something written down that will help guide you in your decision making regarding what services/products you want to offer, how you’ll operate your business, how you’ll get funding, and eventually how you’ll grow your business. Keep in mind though, while a business plan is important it’s more of a road map for your business. Your business will adapt and your business plan will eventually need to adjust.

2 – Consult with Professionals

Before you launch or go live, have a discussion with professionals and experts in the different aspects of your business. I always suggest that new business owners consult at least a lawyer, a financial accountant or bookkeeper, and a tax accountant. (I broke those last two out because not all tax professionals keep books and not all bookkeepers prepare taxes. If you can find a tax attorney that also keeps books, that’s a huge win.) I suggest all three because there are legal, financial, and tax implications for starting and operating a business and it’s good to have an understanding of all up front. A lawyer can help you understand the legal benefits of each of the different legal structures and help create any formal documents to register your business. A financial accountant/bookkeeper can help you understand and set up your bookkeeping systems. A tax accountant can help you understand how your chosen legal structure will affect your tax situation and help you understand what your tax obligations will be.

3 – Consider Legal Structure

I can’t even begin to tell you how many times a client sat down in front of me for their tax appointment and told me that they started a business and they created an LLC, and the only reason they started the LLC was because “somebody” told them it was a good idea. Or, how many clients told me they needed to change their business from a disregarded LLC to an S-Corp. They had no idea what the tax implications of starting that LLC or electing to be taxed as an S-Corporation were. Somebody told them they should do it, and they did it. And in many cases, it screwed them up. Royally.

How you structure your business is important and has real tax and legal consequences. That’s why it’s important that you consider all options and discuss both the tax and legal aspects with the proper professionals before making the plunge.

(Also, we’re besties now so I feel obligated to remind you that you should not be relying on “strangers on the street” for tax and legal advice.)

If your business is an LLC or corporation, you’ll need to draft legal documents to file with the state when you register your business. The Operating Agreement, for LLCs, is a legal contract between the owners of the LLC (called members) and the LLC itself. The Articles of Incorporation, for corporations, is a set of documents that legally create the corporation.

While not required, I always suggest that partners in a partnership draft a partnership agreement. I’ve seen enough partnerships dissolved with no partnership agreement in place on how to wind up the business. Partnership agreements protect the interest of each of the partners as well as the partnership.

Contact a lawyer to help you draft these documents to ensure that all of the necessities are covered.

5 -Register Business with State (if necessary)

Depending on what legal structure you choose for your business you may need to register your business with the state and renew the registration at least annually. Registering your business will help you open a business bank account, obtain loans (if you need them), and build credibility with your customers and vendors. In addition to registering your business, you may need to complete an assumed name certificate if you are doing business in a different name than your legal name. For example, if your name is Jane Doe and your business’s name is Jane’s Clothes you may need to file an assumed name certificate. Check with your local laws to determine if registration is necessary, and what costs are associated with annual registration.

6 – Apply for EIN and Other Necessary Tax IDs

An employer identification number is like your business’s social security number. It’s how the IRS identifies your business on your business tax returns. There are some situations in which you’ll be required to get an EIN but contrary to what the name states, you don’t necessarily have to have employees to have one.

If you’re operating as a sole proprietor with no employees you are not required to get an EIN but I strongly suggest every business owner get one for their business. If you’re ever required to file information returns with the IRS (such as Form 1099-MISC) or if you’re working with a brand or vendor that requests your tax ID, either your SSN or your EIN will need to be reported. EINs are free, can usually be obtained online or over the phone, and can help protect your identity.

You may also need to obtain a state taxpayer identification number (if you have employees) and/or a sales tax identification number (and a resale certificate!). Check your state’s laws to determine if these or other tax IDs are necessary.

7 -Obtain Proper Licenses (if necessary)

Years ago when I owned my own tax preparation company, I had to go to court on a code violation (it was my neighbor’s fault – insert eyeroll emoji). While I was there, several people were brought before the judge for operating without a business license. Their fine was $1,000! Obtaining (and keeping current) the proper licensing and permits for your business is important so that you don’t have to pay any hefty fines or be forced to close your doors. Contact your city or county government to determine what, if any, licenses and permits you’ll need to operate your business.

8 – Consider Accounting Systems

It’s important for you to keep track of your income, expenses, and inventory (if you carry any), and the best way to do that is to utilize one of the many different accounting systems available. You can use an excel spreadsheet that you make from scratch or a custom one that tracks everything for you. You can use desktop or online programs, or mobile apps. You can even use a notebook.

Just… please don’t use a shoebox or a trash bag.

9- Open Separate Bank Account

If you’re operating as a sole proprietorship you don’t need to have a separate bank account for your business. However, I suggest every business owner keep their business income and expenses separate from their personal and that includes cash that is flowing into and out of a bank account. Many small businesses fail in the first couple of years and one of the main reasons is money. Keeping a separate bank account will allow you to see exactly what money is flowing through your business. It makes record-keeping easier because you know that all of the money in and out of that account is business-related. Typically, in order to open a business bank account, your business has to be registered with the state. If your business is a sole proprietorship, I still suggest opening a separate personal bank account for business activity.

10- Commit to Treating Your Business Like a Business

I talk to so many entrepreneurs who operate their businesses more like hobbies. They don’t have formal agreements or contracts in place to protect themselves, they don’t keep accurate (or any) records, they don’t know how much money they’re making in their business. It’s so important to treat your business as a business and not a hobby. From a tax perspective, the IRS can disallow any expenses if they determine that your business is not a hobby and one of the ways they determine that is how you actually run the business. This means that you would need to pay tax on all of the income you earn and you won’t be able to take any deductions to offset that income. From an operations perspective, if you aren’t treating your business like a business it could be hard to grow it into what you want to it to be in the long run.

Kesha JonTae'

Resources

Share Episode

Related Episodes

Episode 25 | 12 Mins What You Need to Know Before Hiring Your Children Thinking of hiring your children? Here’s what you need to know FIRST.ListenRead (this transcript has been edited to improve readability)So first of all, quick update. I know that it's been a while...

Your tax professional should know about the things going on in your life like your best friend does, and in some cases even more so. In this episode, I discuss 8 major life changes that should be discussed with your tax professional either before they happen or as soon as possible after.